Question

With regards to your answer to the previous question:

"You decide to purchase a van to transport your hotel guests to and from the airport. This is a new service you are adding to your hotel because you have noticed from your STR reports that your competitors are having better occupancy percentages and slightly better ADRs. And after some research, you do have a very comparable product but your current guests have also put in their comment cards that they wish you would provide airport transportation. The cost of the van with the upgrades totals $75,000. You are not charging your guests anything but you have estimated that this new service, you should have an increase in your annual cash flow of $28,000 for the next 5 years. What is the IRR of this van?"

let's make a decision.

Assuming your required return is 15%, should the van purchasing project be accepted using the IRR as the criterion? Explain.

Answer 1

			As per PV Table			As per PV Table
			L=15%			H=26%
Year		Cash Flow	Annuity factor	Present Value		Annuity factor	Present Value
1	Cost Of Investment	-75000	1	-75000		1.000	-75000
1 to5	Annual Cash flow	28000	3.352	93856		2.635	73782.0
			NPV	18856		NPV	-1218.02
				A			B
	IRR	25.3%
	IRR = L + {A/ (A-B)} X (H-L)
	Where,
	L = Lower Discount Rate
	H = Higher Discount Rate
	A = NPV at Lower Discount Rate
	B = NPV at Higher Discount Rate
If the IRR of a project is greater than or equal to the project's cost of capital, accept the project
Rate of return is 15%(Cost of capital)
Accept Project